Friday, December 10, 2010

Is Property Truly Affordable?

Some of the more recent reports on property as published by our incumbent major newspaper, The Straits Times, seem to imply that property prices have softened and thus has become much more affordable for the general public. In Saturday’s newspapers (December 4, 2010), an article called “Our First Home” appeared and talked about how median COVs have fallen since the August 2010 cooling measures were introduced, and also gave examples of two young couples who managed to find their dream homes. One of them purchased a 4-room flat at Bukit Panjang (Mr. Kelvin Teo and wife Alberta), while another (Mr. Ang Tiong Wei) was featured purchasing an EC at the newly launched Esparina Residences in Sengkang last month. Overall, the news article(s) tried to portray a very rosy picture of couples finally managing to clinch their very first home, while property prices have “softened” enough for most first-time buyers to readily afford a flat of their choice. But is this really the case?

Much has been talked about measures of affordability such as Price-to-income ratio (HPI), which compares median house price to annual household income. Another often used measure is the debt-servicing-ratio, referred in short-form as DSR. DSR is the proportion of income used to pay mortgages, and it is generally recognized that this should not exceed 35% for it to be comfortable for the mortgagee. In a very comprehensive article (published in TODAY November 12, 2010) written by our Minister for National Development Mr. Mah Bow Tan on housing affordability, it was mentioned that HPI for young couples was around 4.5 for resale flats. But in the example quoted in Saturday’s news, the couple was granted a $50,000 HDB grant on a 20-year old flat in Bukit Panjang (not the most accessible of places in Singapore), and their household income was less than $3,500 a month. A simple back of the envelope computation will show that if the grant was NOT given, the HPI would have been close to 9x or 10x. There may be other similar cases floating around Singapore which have not been highlighted by the mainstream media, but which will become easy fodder for the opposition parties or alternative independent news websites and blogs. The point here is that HPI is still significantly high in Singapore for most young couples who had just started working and do not have high incomes and large savings. Even though a few luckier couples managed to find their “dream” home, they may still be over-leveraged from the point of view of HPI. Now let’s take a look at the DSR in the next section.

The international benchmark for DSR is around 30-35%, and the same Mah Bow Tan article mentions that the DSR for new HDB flats in non-mature (i.e. remote) estates averaged 23% based on a 30-year loan. Accordingly, of course, the article then categorically states that these flats are affordable, even though the ratio comes close to 29% for premium projects such as Punggol Waterway Terraces. I think we have to keep things in perspective, though. What the articles have been talking about here are 30-year loans, which basically span close to half a person’s natural lifetime! I shudder to think of what our society is becoming when taking 30 or even 35-year loans is becoming the norm rather than the exception, as the articles talking about DSR use this tenure as a benchmark. One cannot assume that he is able to “flip” the property at a higher price within 5 to 10 years, as the market, being unpredictable, may frustrate such attempts and you may have to go on servicing your debt into your twilight years. Also imagine a case where the loan tenure was shortened to 20 or 25 years instead of the current default 30 years, I think the DSR would probably soar above 35% for many cases; and many would end up being forced to dip into their cash savings instead of just using their CPF OA to fund their over-priced houses. Not to mention that a lot can happen in a span of 30 years, such as job cuts, pay cuts and retrenchments, which may greatly affect one’s ability to service the mortgage loan. Therefore, generally DSR is a number which can be manipulated by the media depending on the metrics used, and readers have to be careful to sift out information which may contradict conventional wisdom (such as how many people actually fully pay out 30-year loans, as the interest accumulated by then would probably amount to close to 50% of the original cost of the property!).

Anyhow, back to the case of Mr. Ang buying Esparina Residences (an executive condominium or “EC”) at Sengkang. It was reported that he felt lucky to have secured a flat and that he “only” paid $899,000 for his three-bedroom, 1,184 square foot flat. Please note that this is AFTER a $30,000 housing grant, or else the EC would have cost a whopping $929,000! A simple calculation will show that the unit costs $785 psf, which is a hefty price to pay indeed for a condo with HDB-like features and in a remote location like Sengkang. Let’s not even consider the fact that Mr. Ang and his wife CANNOT be earning more than $10,000 a month or else they would be disqualified from purchasing an EC. Let’s take the scenario where their combined household income is exactly $10,000 a month, or $120,000 per annum. This means that the HPI ratio would be about 7.7x for them, which is not exactly low either. The DSR cannot be computed unless we know more about their loan quantum and tenure, but I can bet it’s probably a 30-year loan and that it is “affordable” by conventional standards of having a <35% DSR.

The problems as highlighted above are due to the pervasively low interest rate environment we find ourselves in. Note that for resale flats and EC, it is clearly stated on HDB’s website that one needs to take a bank loan to finance the purchase, and that purchasers are not entitled to obtain a HDB concessionary loan (at a constant 2.6% per annum). Of course, most readers should be aware that bank loans are being offered at phenomenally low rates now of about 1% to 1.5% for a lock-in period of 2 to 3 years, which makes the one taking a HDB concessionary loan look like an idiot (incidentally, I am one of those “idiots”). However, one should also note that interest rates for the last 18 months have been artificially low, and that the long-term average interest rates for mortgage loans should hover around 3% to 4% for bank loans (i.e. higher than HDB’s concessionary loans, which is why it was termed “concessionary” in the first place). So the couples featured in these articles are literally staring at a “time bomb”, as they are fully exposed to interest rate increases in the near future after their lock-in period for their super low-rate bank loans expire. This could literally mean a mortgage installment which is either double or triple that of their current amount, as rates may rebound from a low 1% to 1.5% to as high as 3% to 3.5% which is the long-term average. Even re-financing may not help as all banks would have raised the rates for their new bank loans in tandem with the global economic recovery some time in 2013 or 2014. Therefore, I assert that the low interest rate environment is exacerbating the illusion of affordability by granting couples with cheap current loans which may turn out to be very expensive mistakes in the future.

So with the above evidence being presented, ask yourself this – is property really affordable in Singapore?


Temperament said...

Hi Musicwhiz,

I believe your vision is very true.
I also believe most people are short-sighted by their wonderful, present economic conditions. They just can't or bother to see what's the meaning of a 30 years loan. They can't see by taking the loan, they have become modern slave of the 21st century.
And from now on till 30 years if their financial situations change, what will happen to them?
30 years is a long, long time to bear the burden of a bank loan.
I rather live in a smaller house without this perpetual burden and build my wealth slowly. Meanwhile my family and I do not have to tighten our belts for daily living.
I like what the Cantonese says, "Feasting is the greatest or ICHIBAN.
Ha! HA!

Temperament said...

Hi Musicwhiz,
My apology, for making the mistake of posting twice the same article.

Musicwhiz said...

Hi Temperament,

Yes very true. Living in a smaller and more humble abode is the way to go in terms of wealth building. The idea is to buy what you can afford and not over-extend through leverage. As you say, many people cannot see the effects of such a long loan as most human beings cannot envision the future with that much clarity; hence they live for the "now".

No worries about the dual posting, I've deleted it already.


Ben said...

Hi Musicwhiz

It is important to be prudent when it comes to purchasing the property.

30 years of loan is not a short time. I will not go for the loan that is way beyond my mean.

If I have to choose, I will rather choose a smaller house and do not have to worry about the monthly loan when it comes to retrenchment which is quite common in today's working environment. Nothing is guaranteened when it comes to job security.

I am of view that the property is starting to become unaffordable.

My two cents worth of opinion.


AK71 said...

Hi MW,

I enjoyed this partly because it is an affirmation of my believe that real estate investment can be a hedge against inflation.

It is something I have been sharing with anyone who would listen and this was one of my first blog posts when I started blogging last December.

Real estate as a hedge against inflation.

I have also put my money where my mouth is. :)

Things could get really crazy as money flows to where it is treated best. ;)

Good luck to us all.

Musicwhiz said...

Hi Ben,

Haha it seems we are of the same opinion on property becoming unaffordable, and it is good to know you are a prudent person who will not over-stretch.

Thanks for your views!


Musicwhiz said...

Hi AK71,

Thanks for the link. Yes we should take advantage of a downturn to buy property on the cheap. This is quite similar to buying good companies whose share prices had been battered by Mr. Market for no good reason.

However, since there is always an element of leverage in property purchases (unless you can pay by cash!), this means there is some additional risk of losing more than you put in. So one must be extra careful in using leverage to purchase property.

Good to know that you have put some money into property. You strike me as a savvy investor/trader and probably are also very wise on property. I do visit your blog now and then to get insights on financial matters. Keep it up!


Temperament said...

Hi Guys,

Real estate investment is definitely a hedge against inflation, especially in Singapore.
The main problem is leverage is a double-edge sword. If your timing is wrong, you must have ($$$)very long holding power. Even if you have,I understand people who bought in 1966,99-years leasehold private condos are still not making much money. Maybe not making money at all.

But for people who use leverage to buy landed property (freehold) even only 2 or 3 years ago, it is real bonus time. WHY?
-Our population suddenly balloons more than 35% due to a political belief that's the way to keep this government and nation going on. That's why.)

My point is if you are comfortable with the risks of leverage, the best buy is freehold landed property. Some of my relatives are smiling all the way to the bank.

For me I am only comfortable, if I have $$$ to support a very long holding power in case the real estate market turns against me.
I don't have.
And I am not comfortable.

propertysoul said...

Property has a cycle. Catch it only when it is low.

JW said...

We can only live so long.

Buy when we can afford the mortgage easily, but don't be too much of a scrooge.

Enjoy while we last. Some things can only be enjoyed while young.

propertysoul said...

The problem of buying the wrong thing at the wrong time is that you're stuck with a 'depeciating liability'. You might regret rather than enjoy it.

If the property is for my own stay, I don't want it to be my negative asset (loan > value) in the future.

If the property is for investment, I don't want the market to make me look stupid next time.

Musicwhiz said...

Hi Temperament,

I agree with you on people who purchased at the peak. If they had held all the way until they "broke even", it would still not be a financial gain because of the effects of finance costs and inflation. In effect they are locking up their cash for a long period of time with negative returns. That's the evil side of leverage if you don't use it properly and get caught by it.

True for GCB - I've read that these are highly sought after in land-scarce Singapore and assuming you can actually buy one, you never know if a Jet Li or Gong Li may buy it from you at super inflated prices, haha! That said, of course it still boils down to location and affordability.

In essence, never over-extend!


Musicwhiz said...

Hi propertysoul,

I agree with both your comments. Property has a cycle and some say it is much longer than the stock market cycle which typically lasts 4-5 years. I guess if you know how to catch the cycle at the right time, you can earn tons of money from it. Just be careful of how you use leverage. When in doubt, stick to something familiar. For me, currently it's equities!


Musicwhiz said...

Hi JW,

Haha yes, very true! Good of you to remind me of this too - strike a balance between being frugal and also enjoying life to the best of your ability. It's not an east balance and I do admit I short-change myself sometimes, and youth can never be recovered.

But moving forward I will do my utmost to enjoy the money I have, knowing that I can grow it at a decent rate into the forseeable future!


PanzerGrenadier said...


Personally, I think the recent crop of ECs selling at 600-700+ psf is somewhat on the high side due to the 5 year restrictions and income cap.

If one is willing to look at older developments, private condos in more accessible locations could be had for below 700 psf and you can do whatever you want with them from day one.

Different strokes for different folks but it is getting tougher for young couples and families to own their first home under current conditions because of huge influx of immigrants who compete for relatively scarce housing resources coupled with HDB's "market subsidy" approach to pricing new HDB.

left_ray said...

You should publish your article in the newspaper to warn the general public. People who is reading your blog are mostly interested in financial planning.

I was one of the lucky ones. I bought my Holland V 3 rm flat in 2000 and book a a new HDB flat in SARS year, 2003, at 315k. I sold my Holland flat at 320K which I bought at 152k.

HDB is at least 100% more expensive than 10 years ago. I don't know about others, but my salary did not enjoy 100% jump. It's about 25%jump 4 months ago. Now it's about 60% jump (and if I don't perform, it's going to be backward jump).

Although, I don't really have to worry about house, but I am spending a lot more than 10 years ago due to 2 kids and a maid. And I still find it very difficult for me to save 900K for retirement.

People with massive housing loan and earning about the same as me. I don't see how they can survive if economy go bad.

Personally, I believe the balancing act of affordable house and economy growth is getting difficult.

Musicwhiz said...

Hi Panzer,

What you say is very true - you can indeed find very affordable accommodation if you choose a slightly older condominium; I actually have a friend who did that. I think his freehold condo was like $650 psf and it's considered a steal! Probably not more than 7 years old, but you can see the difference between older condos and the spanking new launches. I liken it to IPO and established companies haha.

With HDB's method of pricing their flats, by using market subsidy instead of true cost, it seriously distorts the market and creates problems for young couples. It''s sad when you hear of couples not being able to settle down and have kids because they cannot afford subsidized housing. I fear this may remain the trend for some time to come; either when HDB wakes up its idea (tough) or when property prices crash (assuming they do!).


Musicwhiz said...

Hi left_ray,

Haha I don't think SPH will publish my article as it runs counter to what ST wants to portray - affordable public housing! I think what I wrote is not exactly politically correct, though it's just my personal views which are being aired.

Yes, you are lucky to get the unit at such a good price! Good move to sell for such a good gain too. Yep it's a sad fact that our salaries have hardly budged over the years, and the rich are in fact getting richer at our expense. It's getting much harder to save cash now with inflation rearing its ugly head, and $900K is a lofty target, that I agree. But we'll probably need much more than that to retire happily, I suspect.

It's not difficult to see that many people are currently highly leveraged. If something drastic occurs then many people will sadly get hit. That dream of retirement will be more distant than ever....


8percentpa said...

Hi All,

Property talk is always entertaining. I had fun reading all the comments.

The point I would like to share is that Singapore might become Monaco, basically a city where the global rich park their money. Think Shanghai, HK, London etc.

In Monaco, rental yield is 1%, prices are USD3000 psf or more. Shanghai is 2% yield, vacancy is 30%, although psf is still ok, maybe lower than SG still.

When Singapore reaches the Monaco stage, basically 99% of the population cannot afford condos. The 5C dream cannot come true. HDB has to support 99% of households. They will need to do some serious thinking about how to build, how to price, and how to sell.

Well frankly, we are not far from this reality. The next downturn is crucial. If prices fall just 10-15%, ie global rich believe in the Singapore model and will park their money here rain or shine.

As a value investor, we cannot chase this. It is against our philosophy. If the 3% yield is too low, we cannot say we want to buy bcos it might go to 1% (ie price will triple). We wait for yield to get to 5% where we are comfortable with the margin of safety and will buy.

What happens if it never get to 5%? (from 3% to 5%, ppty prices need to fall 40%). Well, if it never gets there, that means we can never buy.

The solution is then to rent for life, or to emigrate and buy a cheaper house elsewhere. At 1% yield, you can rent for 100 years until your rent hits the price you bot. And you keep the cash you intend for a house to buy Musicwhiz's stocks which will give you 8-10%pa.


Temperament said...

Hi Musicwhiz,

I remember,I read in the news when Nikkei Index was between 30,000 to 40,000, Tokyo's housing loans needed more than one generation to service. That means a 30-year mortgage loan was not enough.
So the you see "the powers of the day" can always change the financial regulations to suit their situation not ours.
I will not be surprise (if I can live that long) one day Singapore will become like Tokyo.
We must remember the Chinese saying,(literal translation),
"All the world's crows are equally black"
It's very sad. I not sure whether the common people can do anything about it.
Long live democracy???

Musicwhiz said...

Hi 8percentpa,

Your vision of Singapore is frightening haha! If we really become the next Monaco and rental yields hit 1% or below, then I think the Singapore Govt and HDB need to seriously re-think their policies, or maybe by then they would have been rendered obsolete as so many would have piled into private property due to "rising wealth".

And I do agree that we should not be tempted to purchase just because we expect yields to fall (and market prices to rise), and this is akin to stock market psychology of The Greater Fool.

The next downturn, when it comes, may not bring down property prices very much. Even The Great Recession only halted price rises and caused a minor blip but now prices are racing upwards again to break new record highs! I guess interest rate increases may eventually have a dampening effect though I can't say how serious it will be.

It's scary to think of our children renting their apartments for life, instead of actually owning them. But if you think of the loan required to service the sky-high property based on median income, it's not too far-fetched an idea. It's just very very chilling, that's all.


Musicwhiz said...

Hi Temperament,

Japan's case is really one of a mind-blowing bubble, and it's sad that more than one generation has to service the loans resulting from the excesses of the 1980s.

I really hope this does not come to pass for Singapore. Otherwise, I would be very disilusioned with the country and would not hesitate to migrate.